Structured Settlements Authority

How to Get Cash for a Structured Settlement

Structured Settlement Tax Rule

In order to clarify issues regarding the selling of structured settlement annuities in exchange of lump sum payments to third party finance firms, the Internal Revenue Service has created a set of rules.

The regulations first published in February 2003 and finalized later in July of that same year, impose a 40% excise tax on the sale of structured settlements unless certain conditions are met. This tax is applied as a disincentive on all transactions related to the conversion of structured settlement annuity into a lump sum unless the transaction is first approved in a state court.

There has been a significant increase on the number of structured settlement annuities sold by recipients to finance firms all around the country since the 1990s. Structured settlement are long-term, sometimes lifetime annuities that were used to pay compensation to victims who need longtime or lifelong care. However, after receiving the structure, some recipients change their mind and instead opt to sell their settlement policies in exchange for a large lump sum.

The excise tax imposed on the sale of the right to receive future structured payment rights was enacted to discourage finance firms from buying them without going through the courts. Finance firms who were into the business of buying settlement annuities on the other hand were quick to defend that the nature of their business. These factoring companies argue that they allow the structured settlement recipients the benefit of changing their mind about how they receive their settlement claims without having to go back to court. But proponents argue that such actions remove important protections from the recipients and also cause confusion on the issue of the annuities' tax status.

The reason Congress gave a tax break to incomes that came from structured settlement was to promote their use. The reason Congress did this was that in many cases, accident victims who once had the stable source of income from the structured settlement annuity and have later sold their settlement policy and frivolously spent the huge lump sum have found themselves left with no income at all. These same people then become dependents of the state and a burden to society. It is in the interest of the public to encourage the use of structure settlements and in the event that they are sold, that a review is made to verify that the sale is indeed in the best interest of the beneficiary. The regulations released by the IRS clarify the accounting on sales of such settlements as they affect insurers.

Legal Aspects of Getting Cash for a Structured Settlement